As we have now settled into a mindset that short sales are a true way of life and will be for the foreseeable future, many agents are being confronted with some challenges that you will want to be aware of.  For the most part, there are ways to deal with them successfully but again, we cannot guarantee that they will always work. 

First let’s create a flow path of how the process works generally so you and your client can have some perspective on the process.  There are eight general steps in executing a short sale which occurs as follows:

1.   The first step is always to execute a purchase and sale on the property (P&S) between the buyer and seller.  Make sure you include any mandated addenda such as a “short sale addendum” with the P&S.

2.   The second step for any seller/borrower is to submit a complete short sale information package to the lender that the lender will require.  We have covered this required information in previous editions but make sure to advise your client to provide every little bit of information that the lender does require.  When a borrower omits something, either intentionally or unintentionally, it will, at the very least, delay the process.  You will not want to give the lender any reasons for this delay.  The borrower must do their part.

3.   The lender/servicer will then confirm the borrower’s hardship to make sure that the hardship is legitimate.  The most common of these hardships is:

a.      Death of a family member.

b.      Divorce.

c.       Involuntary job loss.

d.      Sudden loss of income.

e.      Involuntary transfer of job.

f.        Large unexpected expenses.

4.   The lender/servicer then orders a Broker Price Opinion (BPO) from a third-party agent.  We have certainly addressed this in previous editions that this could be an opportunity for you demonstrate your proficiency as a potential candidate to work with the lender on being hired to do future BPO’s and marketing their REO properties.  Also, we have encouraged you to do a BPO for your client whether you are the listing agent or buyer’s agent to support your client’s position and to demonstrate your skills as well.  Be aware that if the P&S price is not within range of this BPO, the contract will most likely not get approved.

5.   The lender/servicer will then review the closing costs and fees.  They will go item by item through the HUD 1 Settlement Statement to make sure that the costs that  they are absorbing are acceptable.  We have seen many transactions go sideways here.  For example, in most cases a lender will not cover a home warranty plan or any HOA delinquencies over a certain amount.  Since the seller often has very limited funds, this can create a stalemate with the transaction.  Also, the buyer is forbidden from paying certain closing costs on FHA and especially on VA loans which some lenders are also refusing to absorb.  This can cause the transaction to fall through.

6.   If there is a subordinate lien holder (2^nd and/or 3^rd loan), the primary lender/servicer will determine the amount to be distributed to this lien holder.  It is almost always less than ten (10%) percent of the loan balance of the subordinate loan.  Many of these transactions can go sideways here.  If the subordinate lien holder does not agree, this will also cause the transaction to fall through.  The reality is that if the subordinate lien holder does foreclose, they will have to assume the liability on the first loan and should the first lien holder foreclose, they will be wiped out.  It is also important that the loan is comprised of two instruments:  a promissory note and either a deed of trust or mortgage (security instrument).  While the lien may still get released the note can be sold as an unsecured note to the collection market.  This is happening frequently today.  Your client will want to make sure that they are released from BOTH the lien and the note if possible.

7.   The package is then reviewed for approval by the investor.  This has also been an irritating source of frustration by everyone involved.  While the lender/servicer may approve the transaction and tell you they have done so, it is still probably not a done deal.  Most loans are owned by investors who have reserved the right to approve or disapprove the transaction.  Therefore, a good question might be to ask, “When can we expect to get investor approval of this?”  The reality is that the investor may want more than the lender/servicer has approved.  This is why many of you have thought you may have had an approved short sale to have the rug pulled out from under you because now the investor has rained on the parade.  Be aware that in many cases that the lender/servicer is not necessarily the investor.  In most cases they are not one and the same.  For example, one major lender has over 1600 investors that go well beyond Fannie Mae, Freddie Mac or Ginnie Mae.

8.   Assuming the investor approves the package, the transaction is now back in the seller/borrower’s and buyer’s court to decide if they want to mutually proceed with the transaction.  However, there still may be one more player who could still pull the transaction out of the process.  This would be the private mortgage insurance (PMI) company who still can insist on remuneration in the form of cash or a promissory note from the borrower.  This is not allowable under the HOME AFFORDABLE FORECLOSURE ALTERNATIVE (HAFA) program but is still a recurring problem in many transactions.

Now the most common challenges that are occurring from this process that are stonewalling these transactions are:

·      ESTABLISHING A COMPELLING HARDSHIP:  As we reviewed that the hardship must first be a legitimate hardship, the other factor is the complete information that must be submitted which must include the two years of W-2 and/or 1099 forms, two years of their federal income tax returns, ninety days complete bank statements, financial assets & liabilities, their other debt obligations and a personal profit & loss statement (P&L) along with their Hardship (SAD) Letter.

·      OBTAINING A WRITTEN WAIVER APPROVAL LETTER:  It is considered very critical to obtain a written letter from the investor to (1) Release the lien on the property and (2) Provide a written waiver of any deficiency rights that they have or think they have.  Sometimes there will be a letter that may say something like “We hereby waiver the debt on the subject property” which is very vague and ambiguous along with being subject to interpretation.  If this should occur with your client, please advise them to seek legal counsel to obtain more definitive clarification from the lender.

·      LENGTH OF APPROVAL PROCESS:  We know that this is stating the obvious but it is still very important that you advise your client, whether they are the seller or buyer, that this process does take time and to be as patient and persistent as possible.  Obviously both may get frustrated, especially the buyer.  Advise the buyer at the very beginning of this process of the potential time element here.

·      PMI APPROVAL:  The PMI Company usually already has a pre-approved loss-ratio which was established at the time the loan was underwritten with the lender.  They are going to do whatever they can to cover this which means they may demand a sum of money from the seller/borrower or promissory note.  Often, their assumption is that the borrower will resume payments in which case they can now say there is no default and any claim by the lender with them is now null and void.  YES, THIS IS A GAME THEY ACTUALLY PLAY!

·      THE CATCH 22:  Perhaps many of you have been confronted with questions about whether they should cease making payments and you may be wondering what to advise them to do.  This is a very difficult dilemma and you will want to get your broker involved with this issue.  The truth is that there is no right or wrong answer.  If they cease making payments, this will have a negative effect on their credit and if they continue making payments, they may have difficulty establishing a legitimate hardship in the mind of the lender.  We do know that lenders are prioritizing the most severe situations which means that in most cases non-performing loans are taking this priority.  First, advise your client to seek competent advice on this matter which, in many cases, might mean going to your state’s BAR Association for legal aid, your state REALTOR® Association’s consumer hotline or on www.hud.gov for advice.  In many cases, many have found that if a borrower is still making payments, they need to state very clearly in the documentation that “DEFAULT IS IMMINENT!”  This is actually what many attorneys are recommending.

·      THIRD PARTY NEGOTIATORS:  We have seen an explosion of third-party negotiation services evolve in this short-sale dominated market.  While we understand the temptation to hand this off to someone else, many agents have found that this can actually exacerbate rather than streamline the process.  Some of these entities are not even properly credentialed to be doing this.  First remember that you may be allowing your relationship to be usurped by someone else either in full or in part.  Do you really want that to happen?  Second, make sure any third-party company is fully-accountable to some licensing/certification authority.  For example, a CPA may be qualified for providing tax advice but should probably NOT be negotiating a short sale.  Also, you will want to ask any third party if they have errors and omissions (E&O) insurance.

We do understand that many of you are savoring the days when it seemed that transactions were simpler and cleaner.  But remember that the consumer is looking to you to help them solve their problems and navigate through the complexities of these transactions.  Educate them on the process and always keep them in the loop by keeping them informed every step of the way.  Complications will invariably arise but by  both you and them being prepared, you will be able to deal with them successfully more often than not.

David Compton is a professional speaker/trainer, author consultant in the real estate industry. He is also a partner in Practical Resources with George Smith; a company that specializes in delivering quality educational programs to real estate and mortgage professionals.   He has spent over 36 years in real estate in residential and commercial sales, site selector for a fast food restaurant chain, branch manager, director of education for one of the largest real estate brokerages in the nation, and for the last 25 years as a speaker/trainer.  He has developed over 200 real estate courses and has authored over 150 articles for real estate print and online publications.